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HOUSING AFFORDABILITY
www.demographia.com
SUBMISSION
TO
NEW ZEALAND PARLIAMENT
COMMERCE COMMITTEE
HOUSING AFFORDABILITY
INQUIRY
RESTORING
HOUSING
AFFORDABILITY
15 JUNE 2007
To:
Stephen Mitchell
Commerce Committee Secretariat
Parliament House
Wellington
From
Hugh Pavletich
Co author – Annual Demographia International Housing Affordability Survey
Fellow – Urban Development Institute of Australia
Former President – Southern Division – Property Council of New Zealand
Commercial Property Developer
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TABLE OF CONTENTS
A summary….. 3
Introduction 4
Why the Annual Demographia International Survey is important 6
The Median Multiple Approach 7
The Costs of Elitism 8
The Emerging Recognition of the Need for Change 11
Leading to Forced Urban Consolidation 12
Stifling Our Property Industry 14
The Australians……..Getting on with it 17
How many houses should we be building? 18
Housing construction costs in affordable urban markets 22
RESTORING HOUSING AFFORDABILITY 23
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A SUMMARY……..
The processes required on the path to Restoring Housing Affordability in New Zealand
are not complex.
Within this submission Demographia takes a rather liberal interpretation of the New
Zealand Parliamentary Commerce Committee Housing Affordability Terms of
Reference, which seeks to explore the “components” of the house price inflation this
country has experienced. In working together in finding solutions to this housing
affordability issue, it is important the drivers of it are thoroughly understood first. Sound
solutions require a platform of sound research.
The Annual Demographia International Housing Affordability Surveys are an important
step in providing a technically sound and easily understood measure of the 159 (2007 3rd
Edition) major urban markets of the United Kingdom, Republic of Ireland, Canada, the
United States, Australia and New Zealand.
All the major urban markets of New Zealand have been found to be “severely
unaffordable” at overall six times annual gross household earnings – well outside the
internationally acceptable maximum of three times household earnings, currently being
maintained within forty two North American urban markets.
We were at or near affordable levels during the 1970’s, prior to forced urban
consolidation policies being put in place, providing the platform for the unnecessary
housing inflation we have experienced since. House prices increasing due to the
underlying incomes supporting them is “growth” – but when house prices race ahead of
incomes, it is “inflation”.
This submission explores the underlying causes of this inflation and suggests seven key
areas to focus on in dealing with this issue, being –
* Phased Housing Affordability Targets.
* Liberalizing land use processes.
* Minimizing peripheral land price distortions.
* Equitable infrastructure financing.
* Economic impact analysis.
* Professional education.
* Research.
We must work together restoring housing affordability within New Zealand.
Hugh Pavletich FDIA,
Christchurch,
New Zealand.
hugh.pavletich@xtra.co.nz
Tel ++64 3 343 9944
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SUBMISSION ON HOUSING AFFORDABILITY
“RESTORING HOUSING AFFORDABILITY”
To: New Zealand Parliament Commerce Committee
Chairman: Mr Gerry Brownlee MP
INTRODUCTION
This submission is from Hugh Pavletich of Christchurch, New Zealand, co author with
Wendell Cox of St Louis (Missouri Illinois) United States, of the Annual Demographia
International Housing Affordability Survey – now in its third edition and released 22
January this year. My background and that of my colleague Mr Cox, is outlined within
the concluding part of each annual edition. Within this years Survey, we have
incorporated a section “Restoring Housing Affordability” which discusses in broad terms
the issues Demographia is of the view need to be focused on. Of necessity, the points
made had to be “broad” in their approach – as this years survey covers 159 major urban
markets within the Anglo sphere of the United Kingdom, Republic of Ireland, Canada,
the United States, Australia and the three major urban markets of New Zealand.
I would appreciate the opportunity to appear before the Committee, to speak briefly of
the submission, but most importantly, to respond to any questions the Committee may
have.
Firstly – I would like to sincerely thank those who took the initiative in getting this
important Inquiry underway and the many individuals, both within New Zealand and
internationally, who have assisted in working towards finding solutions to restoring
housing affordability. With respect to New Zealand, particular mention must be made of
the excellent research work by the Centre for Housing Research of Aotearoa New
Zealand (CHRANZ), led by Terrence Aschoff and the many individuals associated with
this small organisation.
The Bulletin to the CHRANZ February 2006 Report "Regional Housing Markets in New
Zealand: House Prices, Sales and Supply Responses" , authored by Dr Arthur Grimes and
Andrew Aitken of Motu Economic and Public Policy Research, succinctly gets to the
core of the issue within the Introduction –
“House and land prices have risen in real (CPI-adjusted) terms by 105% and 286% each
on average across New Zealand between 1981 and 2004. A strong regional divergence in
house and land inflation reflects differences in demographic and economic variables in
the regional responsiveness of new housing supply to population pressures. From the
modelling, land prices appear to have made the greatest contribution to the growth in
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house prices. It is recommended that a key policy focus should be ensuring that land
prices and construction costs are kept to a minimum, consistent with other objectives
(my emphasis). This will require planning and regulatory processes conductive to
development of residential land and to the construction of new dwellings”
Due to political inertia at central, regional and local government level, the situation has
been allowed to worsen since then.
Wendell Cox and the writer take an independent “facts and figures” approach to urban
issues and housing affordability. The Annual Demographia Survey for example, is
prepared on an independent and voluntary basis, without external financial support. We
are strongly of the view that this important issue transcends politics and political
philosophies.
In an endeavour to keep this submission as concise as possible, much of the supporting
material referred to is hyperlinked, to allow readers the opportunity to delve deeper in to
particular aspects of this issue as they wish. Readers are encouraged to refer to the
extensive housing affordability material available on the Demographia website. This
includes the 2007 Demographia International Housing Affordability Survey, the 2006
edition, links through to much of the international research on this issue and regular
updates of important news, political developments, commentaries and reports from within
the six countries surveyed.
Within this submission I will tend to focus on the political pressures, which in my view,
led to the current housing affordability crisis. As a commercial property development
practitioner of some thirty years experience, a former industry leader and an international
researcher over the past three years – my “perspective’ may differ at times from those
with experience outside the industry, or from those from a professional or academic
disciplines associated with the property industry.
The Inquiry Terms of Reference include the following statements –
To ensure that as many New Zealand families as possible will be able to achieve the
traditional Kiwi goal of homeownership at a fair and reasonable price.
And…….
Identify and quantify all components of the cost of housing for first home buyers in
New Zealand and examine significant shifts over time.
The Terms of Reference then sets out eleven key areas of interest.
This submission will of necessity take a rather liberal approach in identifying and
quantifying all components of the cost of housing. These “components” cannot be
considered without adequately understanding the drivers of them. In other words, what
caused our urban markets to become severely unaffordable, whilst affordability has been
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maintained within the forty two major urban markets of North America, identified within
this years Demographia International Housing Affordability Survey.
WHY THE ANNUAL DEMOGRAPHIA SURVEY IS IMPORTANT
For those of us who were active in the property market back in the 1970’s, there was a
well understood “rule of thumb” that housing should not cost any more than three times
annual gross household income and that the mortgage should not exceed two and one half
times that income. This guide faded from common usage in New Zealand from the early
1980’s, as local authorities became increasingly dilatory in releasing land for housing
development and raw urban land costs started the destructive price inflation.
Back in mid 2004, I decided to check out the “affordability” of a number of North
American markets and found that they had maintained house prices at or below three
times gross annual household incomes. The classic book released in 1991, Edge City by
Joel Garreau, a reporter with the Washington Post, was also a strong influence. His book
is important as it provides a dispassionate perspective of the realities of urban
development. I then suggested to a number of academics in this country, that we needed
to get a survey underway of urban markets within the Anglo world – who responded by
saying that the idea was “irrelevant”. Fortunately, Wendell Cox, Principal of
Demographia in St Louis, USA, thought the idea was “relevant” – which then led to the
first Annual Demographia International Housing Affordability Survey, released in early
2005.
This annual survey has now expanded greatly, with the 3rd Annual Edition released 22
January 2007 generating 150,000 downloads through the first week and is still running at
large volumes, some five months later. It is being increasingly recognised throughout the
Anglo world, as the annual reference on the structural issues relating to housing
performance and stress.
The Annual Demographia Survey is based on the “Median Multiple” methodology,
recommended by the World Bank and the United Nations, being one measure within a
suite of measures and performance standards put in place by these organisations during
the early 1990’s. These had been developed by Professor Shlomo Angel and a colleague,
the late Steve Mayo. Angel is Adjunct Professor of Urban Planning at New York
University, a senior policy advisor to the Inter American Development Bank and is also
the author of a highly regarded book Housing Policy Matters - A Global Analysis .
Professor Angel is a regular presenter on these issues and spoke recently at the United
Kingdom Audacity "All Planned Out" Conference, which was a gathering of many of the
leading researchers and advocates on these issues, from around the world. I had only
learnt of these measures in late 2006, whilst reading the China Peoples Daily on Line. It
would be fair to say I think that they had “gathered dust” within these organisations
within the intervening years – and had not been followed up on and developed further, as
they should have been.
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THE MEDIAN MULTIPLE APPROACH.
The Median is the middle number of a series of numbers, so that for example if you have
five numbers in a series such as 2,4,6,10,20, the median is the middle number, being 6,
whereas the average is the total of the numbers, divided by the five numbers provided in
this example. So the average of 2,4,6,10 and 20 (total 42) is 8.4. This distinction is very
important when we are talking about real estate, because if there is more activity at either
the lower or higher end of the market, and averages are employed, the statistical
information can be excessively erratic and convey the wrong impression of market
trends. Therefore researchers generally employ the “median” approach, when discussing
market trends.
The same reasoning applies to incomes. Due to a small number of people and households
earning high incomes, averages are avoided and medians are employed, so that a more
accurate position is conveyed.
If we are looking at an urban market of say 100,000 households, we want to know what
the 50,000th house is worth and its gross annual household income. There will therefore
be 49,000 houses above this and 49,000 houses below these figures -the mid point.
Therefore Demographia, the World Bank and the United Nations employ the Median
Multiple methodology, where the house price is divided by the gross annual household
income, to arrive at a Multiple. Say the household income is $50,000 and the house price
is $150,000. That means that the house price is three times the household income, so it
therefore has a Multiple of 3. If the household income again is $50,000 and the house
price is $300,000, that means that the house price is 6 times the household income and
therefore has a Multiple of 6. Interestingly, New Zealand was the former back in the
1970’s, but it has deteriorated to in excess of 6 times earnings now – and will deteriorate
even further, until something is done about the problem.
Both the 2007 3rd Edition and 2006 2nd Edition Demographia International Housing
Affordability Surveys should be read closely. These Surveys have deliberately been kept
concise (around 40 pages for this year’s edition and slightly less for last years). Extensive
use has been made of endnotes with hyperlinks, to allow deeper research as required.
Within this years survey, you will note overall the median multiple of the urban markets
surveyed, that Australia is 6.6; New Zealand 6.0; Ireland 5.7; United Kingdom 5.5;
United States 3.7 and Canada 3.2 (data September Quarter 2006). You will note in
reading the Real Estate Institute April 2007 Residental Market News that median housing
prices throughout the country have inflated from $305,000 in April 2006 through to
$349,000 in April 2007 – a staggering 14.42%. At this rate, house prices would double
every 4.85 years in New Zealand. A poverty creation programme if ever there was one.
Expressed another way – (as at September last year) for every 10,000 in local currencies
of gross annual household income, an Australian would be faced with housing costs of
66,000 dollars, a New Zealander 60,000 dollars, the Irish 57,000 euro, the British 55,000
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pound, the American 37,000 dollars and the lucky Canadians just 32,000 dollars. And the
even more fortunate people of the ‘affordable” markets, such as Dallas Fort Worth,
Houston and Atlanta can expect to pay just 29,000 dollars, based on 10,000 dollars of
household income.. That’s without taking in to account mortgage and associated
operating costs.
Within the 2007 Demographia Survey, the multiples for New Zealand major markets of
Auckland, Wellington and Christchurch are as follows (again – September Quarter 2006
data) –
Multiple Median Household Income Median House Price
Auckland 6.9 $57,500 $395,000
Wellington 5.4 $61,400 $331,000
Christchurch 6.0 $48,400 $291,000
All the major urban markets of New Zealand are now rated as “severely unaffordable”.
Prior to the Annual International Demographia Surveys being generated, most New
Zealanders and Australians were unaware of just how inflated and distorted our urban
markets had become. And sadly, it would appear not too many from within the property,
planning and banking sectors were in any hurry to draw attention to this issue –
obviously, for their own reasons. A survey of this type (which is by no means complex)
should have been generated years ago.
The Demographia Surveys were particularly helpful in Australia, where it “reignited” the
issue, as outlined within a recent Australian OnLine Opinion article following the
debacle of the 2004 Australian Productivity Commission Home Ownership Report ,
which pretty much scuttled the housing affordability issue at the time. This Report did
have one beneficial result though, in that it bought to the fore, generalist economist’s
woeful understanding of urban markets – an issue I will touch on further within this
submission (Professional Education).
The Annual Survey has also assisted in stimulating massively heightened research
interest globally on urban issues. One leading British researcher told me recently how
surprised he is, with the massive build up in interest being shown in urban issues by think
tanks and researchers around the world. Belatedly, many are now gaining a better
appreciation of the reality, that our urban markets are the major drivers of a modern
economy and the massive costs in social, environmental and economic terms of
strangling, distorting and inflating them.
THE COSTS OF ELITISM
Excessive political interference and land use planning in historic terms is of very recent
origin and something that started in New Zealand soon after the Second World War, with
the enactment in New Zealand of the Town & Country Planning Act, during the time
when we and Australia were tied to “Mother England”. The bonds were very strong and
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best expressed in the words of Sir Robert Menzies, Prime Minister of Australia “Where
Britain goes – we go”.
Whilst we and the Australians have much to thank “Mother England” for - with respect to
this issue, it is a great pity we caught this particular “British disease”. The Canadians
were very fortunate in avoiding this malady, as their ties with Britain have never been as
strong as ours here in New Zealand and Australia. Similar thinking has only emerged in
the United States over recent times; with Richard Florida and his Creative Class Group
.This largely explains why the overall Median Multiple in Canada is just 3.2, whereas
ours in Australia and New Zealand is higher than 6 times.
True creativity is based on reality and discipline and is best illustrated by people with the
capacity and energy to solve real problems and “get things done”. These people come
from all walks of life. To think of “creativity” in terms of “class” is abhorrent.
There are still strong linkages between Australasian and British planners and many from
this part of the world work in Britain at some stage through their careers. If our planners
wish to persist in learning what not to do, they should continue travelling to the United
Kingdom. If they wish to learn what to do, it would be better for them and the public they
are paid to serve, if they travelled to North America (Canada and the United States)
instead.
Intrusive and destructive British planning was created to a large extent by the architecture
profession. Although enlightened social reformers such as Ebenezer Howard could be
considered one of the early leaders in British planning, as founder of the Garden City
Movement, which in time evolved in to the Town and Country Planning Association ,
increasingly architects such as Sir Patrick Abercrombie and others began to dominate.
We are still living with this influence – and should not be surprised that today’s planning
schools are often linked to schools of architecture.
Abercrombie had a low opinion of economists, describing them as “muddlers”. As one
leading international planning academic told me recently “economics only corrodes
planner’s visions”! This trend of architects dominating urban issues in Britain was also
assisted enormously by “state led” desires of the weary British people following World
War Two, when the Atlee Government assumed Government in 1945.
At least in Australia and New Zealand - the influence of architects in politics and
planning was driven in large measure by their declining role in the wider property and
development markets. Greater affluence following World War Two, triggered rapidly
increasing suburbanization (with the US Levittown leading the way), which in turn
spawned the residential production building sector and more demanding and cost focused
commercial and industrial development. Suburbanisation should properly be seen as a
massive social, environmental and economic achievement, which dramatically improved
the quality of life for people.
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It has been indicated to me that in Australia, architects are involved in just 1.2% of the
housing being produced. During 2006 there were around 145,000 residential units built in
Australia, which would suggest that architects may have been involved in just 1,740 of
them. I would expect it to be fairly similar here in New Zealand. By far the majority of
the detached housing and smaller scale multi units are designed by either in house
production builder architectural designers or external consultants. With the larger scale
multi unit residential and the commercial and industrial developments, the engineering
profession dominates. Modern multi unit residential and commercial and industrial
developments are often very complex, requiring a large range of sub specialties and
skills.
Often with these more complex structures, structural engineers are retained as the lead
consultants (reporting to the developer or project manager), with specialist engineers,
quantity surveyors, architects and others being retained on a sub consultancy basis.
Generally - engineers (derived from the Greek word for “innovation”) are seen as more
aware of the importance of economics and cost control than architects (we need to be
careful here that we don’t play to the egos of engineers!). This cost pressure is driven by
consumers (whether they be commercial or residential), demanding the best product at
the lowest possible price – which is exactly how the system should work. The consumer
is sovereign after all.
In New Zealand, the numbers of architects dwindled to such an extent because of their
declining market support, forcing them to relax the membership rules for a time some
years ago, when they admitted a significant number of architectural designers to the ranks
of the Institute of Architects. In fact, quite often the best and most creative architects
today, have had nothing much more than architectural design training.
The profession of architecture has been dealt a heavy blow for its elitism, arrogance and
distain for economics and as it has withered, understandably, as a vent the profession has
played an increasing role in planning and politics. In other words – “if we can’t get
people to support us, we will work through political channels (with planning) to impose
our ideas on others”. The “Design Committees” Local Authorities are currently “playing
around with” are just one small example of this.
Robert Bruegmann , Professor of Art History, Architecture and Urban Planning at the
University of Illinois at Chicago and the author of numerous books, including the widely
acclaimed "Sprawl - A Compact History" , sheets the blame for forced urban
consolidation on “urban elites” contempt for suburbanisation and demonstrates that urban
sprawl is a natural process, as old as the world’s oldest cities.
Politicians would understand – as they are often “tormented” by people asking for their
support, in imposing products and services on others, not willing to purchase them.
Little wonder then that planning – or more properly land use regulation – is largely
driven by “how things look” and not by “how things work”. We are not likely to see
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those with a deep interest in the aesthetics of land use, show any particular interest or
concern about housing affordability, simply because they are too often oblivious to the
realities of people’s daily lives. In fact most of them could best be described as
“aesthetes” which is defined as –
“One who’s pursuit and admiration of beauty is regarded as excessive or affected”.
I will resist the temptation of using any Australian definitions of the word!
THE EMERGING RECOGNITION OF THE NEED FOR CHANGE.
There is however constructive change taking place, as the New Zealand Planning
Institute media release of February this year illustrates by “strongly supporting” the 2007
Demographia Survey, in stating that -
“……affordable housing takes its rightful place in the heart of community planning
decision making, alongside other key elements such as environmental sustainability”.
I responded to the New Zealand Planning Institute people, commending them for the
responsible and helpful release, with (as usual!) further comments. Its National President,
Dr Michael Gunder and I met in Auckland and there have been numerous
communications with the Institutes CEO Ms Julie Mackey, who unfortunately will soon
be leaving this position. It is my hope that we can work with these people and others in
coming months, in exploring ways to get more “how things work” training and
retraining incorporated within their education programmes. The reality is that most
people involved in land use regulatory administration, now realize that “something must
be done”.
Also fuelling this heightened regulatory activity and the insatiable appetite for ever
increased funding within local government, has been the phenomenon known as
Parkinsons Law (the title of a book written soon after WWII by the British Professor C
Northcote Parkinson, with great wit and perception). Parkinson explains how “work
expands to fill the time available” as bureaucracies (whether they be public or private)
require ever increasing staff and financing – just to stand still! We currently have in New
Zealand “Parkinsons Law in Overdrive” within the local government sector, caused by
earlier amalgamation, legislative changes in 2002 giving local government the “powers of
general competence”, elected representatives at local level, not being prepared to provide
clearly understand guidelines and performance standards for staff to strive for. The
important roles of “governance” and “management” are still poorly understood within
local government – another issue that needs to be addressed urgently. The reality is that
in larger local authorities, the staffs have greater capacity to control elected
representatives, whilst in the smaller ones; elected representatives better understand
what’s going on. Local Government performance does not get the media attention it
deserves either.
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It appears to me that there are two key issues to address with respect to local government.
Firstly – ensure that funding is aligned with the services provided, so that property
services are financed by property taxes (rates) and community and social services are
financed by income or consumption taxes – for obvious reasons of equity and efficiency.
Secondly – it may be desirable, particularly within the larger local authorities, to have
Infrastructure Councillors and Community Councillors. Those with commercial expertise
may be more attracted to the former, whilst those with an interest in the social and
community services stream of local government, may be more attracted to the latter.
However, this hugely important issue is better discussed in another forum.
LEADING TO FORCED URBAN CONSOLIDATION
Understandably, this “elitist culture” was a fertile “breeding ground” for the development
of forced urban consolidation policies – sometimes referred to with the Orwellian term
Smart Growth. Interestingly, there is no reputable research internationally
underpinning these policies. They were essentially “sold” to gullible politicians at local
level, on the pretext that starving land supply and consolidating urban markets would
“save” money on infrastructure (which it doesn’t) and free up resources (rate payers
money) for more “fun things”. Infrastructure issues can become a little tedious and
indeed boring for local government. And forced urban consolidation, with its ability to
create compounding problems and further work is a bureaucrat’s (and their consultants)
honey pot. Local politicians (with more often than not a blissful ignorance of the property
market) also find it enormously satisfying with the unwarranted “power” it gives them.
The only surprising thing is that we have not seen the degree of “corruption” experienced
in other countries, due to these policies.
A local politician or a senior local government employee is indeed very vulnerable to
being corrupted, when he or she has the power to move zoning lines on maps, which
determines whether a block of land is worth, for example, $50,000 (say rural) or
$1,000,000 (say raw urban) per hectare.
I am confident that within three to five years, academics will be writing books on
how these disastrous policies of forced urban consolidation, gained the political
traction they have.
The reality is that New Zealand , with a land area of 268,680 square kilometres and a
population of just 4,177,000 is lightly populated. The United Kingdom with a land area
of 244,820 square kilometres supports a population of 60,776,000, where well less than
10% of its land area is urbanised (they are currently determined to “save” the redundant
EU subsidized farm land and live in shoeboxes!). With around 80% of New Zealand’s
population or 3,341,000 people residing in urban areas (down to the smallest towns) at an
estimated urban density of 1,900 per square kilometre, this would suggest that
approximately 1,758 square kilometres of our land area is urbanized – representing
around 0.65% of our total land area! This is based on the Demographia World Urban
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Areas Density Tables, which employs methodology used by national census bureaus in
the United Kingdom, Canada, France, the United States and elsewhere.
If we wished to urbanise a further 50,000 people around our urban fringes each year (a
very big ask) – at the current Christchurch density of 1,900 people per square kilometre,
we would therefore require 23.31 square kilometres of additional fringe urban land
annually, which would represent 0.0086% of our total land area (again 268,680 square
kilometres total NZ land area) annually or less than half a percent (0.43%) of out total
land area over the next fifty years. So at best - if we opened up urban land supply now,
we may urbanise as much as 1.08% (0.65% currently urbanised plus 0.43% projected to
be urbanised) in total by the year 2057.
It is simply not an issue, if we urbanise 1%, 2%, 3% or much more of our land area. Not
when there are “real” issues out there - such as poverty, excessively priced and poor
quality housing, excessive household debt, excessive interest rates underpinning a
ramped up currency, declining homeownership rates and an economy that’s been
unnecessarily stifled – simply because we have fallen for the forced urban consolidation
myth.
Instead, the advocates of forced urban consolidation have triggered a “flight to
affordability” as lower income people in particular, have been forced out to cheaper land
in outlying towns (e.g. Darfield, West Melton, Rolleston, Rangiora, Amberley) and rural
areas. A 2004 Lincoln University Study of Lifestyle Blocks found that 6,800 new blocks
are created each year throughout New Zealand for about 18,000 people, requiring around
376 square kilometres of land.
So putting aside the outlying towns for a moment – the drivers of forced urban
consolidation are generating “splatter” and forcing around 376 square kilometres a year
out of farming use, instead of being reasonable and sensible in allowing many of these
people to “consolidate” in urban areas and around the fringes, that would at most require
23.31 square kilometres or 0.0086% (less than one hundredth of one percent) of our total
land area each year.
To date – there has been no in depth research on the “disruption costs” of these disastrous
policies of forced urban consolidation – but it would be fair to say that they are “truly
massive”. After all – our urban markets are the engine drivers of a modern economy.
Hopefully we will start seeing local and international research on this important issue
over coming months. Understandably, the advocates of forced urban consolidation have
been in no hurry to generate this research – as it has nothing to do with expanding
bureaucratic control and growth.
We do know that the turnover rate of this Lifestyle Blocks is around once every five
years, whereas standard urban housing turns over around once every seven years on
average. To urban people with no rural experience, these Lifestyle Blocks can appear to
be rather enticing and romantic. But for a significant number of them, these Lifestyle
Blocks soon turn in to Life Sentence Blocks, as the time and cost of maintaining them
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becomes better understood. They are also faced with excessive vehicle running costs to
work, friends, schools, shops and the children’s activities. Then before long they find that
their “friends” are not willing to travel an excessive distance to visit them. The dream
soon fades.
Whilst some research (e.g. within the Rodney Council area) would suggest that those
purchasing Lifestyle Blocks are “happy” with their decisions, in my view, the turnover
rates tell a different story. It is unlikely too, that survey respondents would be willing to
tell researchers that they regretted their decision to purchase. My sense is that these
Lifestyle Blocks look “good value for money” (currently they are much easier to create,
in comparison with lots / sections around the urban fringes – so the inflation is subdued)
in comparison with prices within the urban markets and too often, purchase decisions are
made impulsively (the Rodney research indicates this). Many purchasing them are on
very low household incomes.
It would be helpful if research could be undertaken - comparing the density of Lifestyle
Blocks within say a 40 kilometre radius of our major urban markets, in comparison with
the densities around the affordable North American urban markets of a similar size. I
would suspect that our Lifestyle Block densities in New Zealand would be substantially
higher.
The only real beneficiaries of forced urban consolidation that I am aware of are banks, oil
companies and speculators. I touched on these points within a short article “NZ & UK
Labour show the ALP (Australian Labour Party) the way” I wrote back in 2006 for the
New South Wales moderate left website . That was following the leading New Zealand
monthly general interest publication, “North & South” August 2006 Cover Story “Locked
Out” by Virginia Larson, dealing with housing affordability and our Housing Minister
Chris Carters subsequent excellent speech late September 2006 to the Real Estate
Institutes National Conference. It is hoped the Minister gets “back on track” again
shortly. He needs to.
STIFLING OUR PROPERTY INDUSTRY
This unnecessary forced urban consolidation and “regulatory overload” has hugely
damaging consequences for the property industry – again - something those from outside
the industry may not appreciate. As a long time practitioner, I will touch on some of these
“damaging consequences”, but before I do, it needs to be clearly understood that I’m a
strong supporter of good governance. After all, good governance is a very necessary
foundation for a properly performing property market. Governance however must “add
value” in social, environmental and economic terms – not stifle it.
Firstly – excessive regulatory intervention pretty much turns the property development
process from a commercial enterprise in to a political and legal quagmire. It is not
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uncommon for commercial property developers, such as the writer, to spend around 70%
of the project time on the political and regulatory aspects of a development. The other
components of the process, such as acquiring the land, negotiating leases, assembling and
instructing consultants, negotiating with builders, overseeing the construction and
negotiating with end purchasers, may take around 30% of the time. In fact – when
construction starts, one pretty much feels that it is about the end of the project!
As the political and regulatory processes (with inquisitorial community hearings and
consultation) seem never ending – one gets the distinct impression that the property
development process seems to be a “criminal activity”!
With local authorities strangling land supply and inflating land prices, understandably
this tends to make projects (whether commercial or residential) riskier and degrades the
quality of the development (too much spent on the land forces less finance available for
the actual building – meaning poor quality). Without secure and affordable land supply,
this tends to further politicise the process. Put rather bluntly – no land – no business.
In properly performing urban markets – land - like concrete, timber and other materials,
is simply a component of production and should not be an issue. The builder or the
developer is then working in a sound environment, where one can focus on actually
getting in place the best quality development, at the lowest possible price (as in the 42
affordable Demographia urban markets) – where the consumer and the wider community
are the real winners.
But instead – with “insecure land supply”, the focus of the developer or the builder is
distracted to ensure secure supplies of land going forward, at grossly inflated prices. It is
not uncommon for developers / builders to be “carrying” unnecessarily, tens or even
hundreds of millions of dollars of land at inflated prices (land banking) – the costs of
which are of course forced on to the end buyer. It should not be forgotten that the builder
and the developer (essentially property manufacturers) are the “intermediaries” – and
simply have no other option, other than to pass these costs on to the end purchaser.
It could be worse I suppose. Just imagine if local government was in building supplies as
well? The poor builders would have to store materials for about possibly 200 to 300
houses in the yards, to protect themselves against “scarcities”!
When the local authorities strangle the supply of land around the urban fringes – it puts
those holding the scarce land in a very strong negotiating position. Using the word
“negotiating” is somewhat inaccurate, as often these “favoured few” (who can too often
be “well connected politically”) understandably develop the attitude of “take it or leave
it” and wind the prices up. Today – prices for small lots or sections around our urban
fringes can easily be $200,000; $250,000; $300,000 or even higher. They should only be
a fraction of that – as I will discuss a little further on within this submission.
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I should be saying at this point that first home buyers “suffer” because of this. They
don’t. The prices are so inflated, that they were shut out of the fringe new housing market
long ago.
In turn, this “take it or leave it” attitude, works its way “down the food chain”, as local
government, in creating these unnecessary artificial scarcities and failing to act in the
wider public interest, has allowed those with the land supply to pretty much “charge what
the market will bear”.
The house builders are then put under enormous unnecessary pressure, as they strive to
meet their customers’ expectations with these excessive land costs, particularly as the
existing housing stock is inflating (currently around 14%) around them as well. The
problem is particularly acute in the United Kingdom – something Kate Barker of H M
Treasury discussed at length within her important 2004 Housing Supply Report which
was followed in 2006 with her Land Use Planning Report .
With this tighter land supply situation, it means that smaller fringe subdivisions are
created and house builders are forced to build small numbers of houses and single infill
ones, so that “economies of scale” cannot be achieved. In large measure – that’s why our
housing construction sector appears to be around 30% more expensive and less
productive than the Australian one currently. As this land supply worsens, eventually the
production builders “die” (as happened in New Zealand through downturns during the
1980’s and 1990’s) and the industry “splutters along” with only the less efficient and
more highly priced cottage builders remaining. This is currently the situation in
Tasmania.
Within a recent National Business Review article by Chris Hutchings, an Auckland
developer and investor clearly outlined the difference in current costs between detached
housing on the fringe and the much higher costs for density development. Mr Fermah of
the Fermah Group said within the article –
“The miracle salvation of high density housing was an illusion driven by bureaucrat’s
who had no idea of costs”.
And further……….
“It doesn’t take a rocket scientist to work out that without central, regional and local
bodies exerting some control of the costs they are feeding through, that New Zealand
house prices will move to a new plateau over the next five years”.
In contrast – the Australian residential production sector is significantly more efficient
and it is not uncommon for them to construct standard housing within eight weeks. The
“culture” is extremely dynamic and efficient. If a “sparkey” is programmed to start a job
at 10 in the morning and doesn’t turn up, he’s fired – and conversely if the “sparkey”
turns up and the builder is not ready for him, the builder is fired! At least that’s the
“attitude”, although I’m sure that it’s not quite to that extent – at least very often. But the
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“pressures to perform” are deeply ingrained within the industry and have been refined
over many decades.
McKinseys Global Institute some years ago researched the construction performance in
major residential construction markets around the world at a “micro” level and rated the
Australian residential construction sector one of the two best performers in the world.
The founder of the Institute, William Lewis, subsequently wrote a book The Power of
Productivity , where he talks in glowing terms of the Australian residential production
sector. We should not forget that there are many New Zealanders (and people from
Britain and Europe too) working in the Australian residential production sector. Sadly,
many of these people were driven from our country during construction downturns
through the 1980’s and 1990.s – due in the main, to local authorities starving the New
Zealand urban markets of affordable land. The Australians have not had this land supply
problem for as long as we have.
Regrettably – the Australians are at serious risk of destroying these productivity gains,
painstakingly built up over decades and generations, due to the unnecessary State
Government created land supply “circus” in that country. Already I think Australia
housing construction performance has slipped behind that of the “affordable” markets of
North America. Let’s hope the political leaders of the State Governments “come to their
senses” quickly, and allow the Australian housing construction performance to become a
world leader again.
THE AUSTRALIANS - GETTING ON WITH IT.
In my view, the Australian property organisations are probably the most dynamic in the
world - in the way they are prepared to engage constructively in political issues and take
positions that are in the wider public interest. One cannot speak highly enough of the
dedication of the people from the Housing Industry Association (HIA), Property Council
of Australia (PCA) and its subsidiary organisation, the Residential Property Council of
Australia (RDC), the Urban Development Institute of Australia (UDIA) and the huge
volume of quality research generated by these organisations over the past few years. The
Melbourne based Institute of Public Affairs has also been a major participant, with its
landmark report of 2006 The Tragedy of Planning and numerous other articles and
reports on this issue. And community organisations such as Save Our Suburbs (SOS) ,
within the major cities along the eastern seaboard are also playing their part too.
In contrast, organisations associated with the property industry in New Zealand have
been rather timid to date – but it is hoped that they will participate more actively going
forward. Others from across the wider community need to as well.
Because of the extensive media coverage of this issue in Australia – it is now well
understood that the key problem is inadequate land supply, followed closely by excessive
taxes and charges and slow processing times.
The Deputy Premier and Treasurer of Queensland, Hon Anna Bligh stated recently that –
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“Our commitment extends to those who are vulnerable and struggle to access the private
housing market. It extends to those who rely on affordable rental housing and to those
seeking to own their own homes”.
She also recently made it clear where her Governments focus is now –
“Our government is focused on the barriers to affordability and will implement
legislative and policy changes, development approval processes and land availability to
cut costs for new housing.”
She needs to act urgently. What has happened in Queensland can only be described
as a public policy tragedy. It was once the most dynamic and affordable State within
Australasia - the State of opportunity. But the chorus for action to restore affordability
has been growing, as just some of the recent media reports illustrate - here, here, here,
here, here, here,
It is now well known within Queensland and elsewhere, that section / lots around
Brisbane cost about $50,000 more than they do on the fringes of Melbourne as outlined
within the Urban Development Institutes media release earlier in the year, following the
release of the 2007 Demographia Survey. Whilst section / lot prices are still excessive on
the fringes of Melbourne, they have become absurdly expensive on the periphery of
Brisbane – and elsewhere throughout Queensland.
The State of Victoria has in fact been releasing land (but nowhere near enough), as has
the ACT.
It is now generally understood, that the land release policies of the Western Australian
Government have been a disaster, as residential property prices soared in excess of 35%
in Perth during 2006. At least the Government is belatedly starting in to the process of
speeding up the release of new urban land.
It is unbelievable how the dynamic nation of Australia, with such a large land mass
(around the size of the United States with a population of 300 million)) and a relatively
small population of just 20 million – ever got in to this mess in the first place.
HOW MANY HOUSES SHOULD WE BE BUILDING?
The Demographia Surveys are an excellent “springboard” for exploring urban markets
that are maintaining affordability. It is important to recognise this and realise that this
important issue is not “theory”.
My view is that urban markets experiencing positive population growth should move
between 2.5 to 3.0 Median Multiple through the building cycle. As demand increases,
further supply should “kick in” (it becomes profitable for new supply to be provided).
The increasing new housing supply should then subdue inflation and as the new supply
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exceeds demand, the urban market should then move steadily back towards a Multiple of
2.5. Urban markets with population growth at around 1% annually should be putting in
place around 7 to 9 residential units per 1000 population through the building cycle.
Those with population growth in the order of 2%, should I think, be putting in place in
the range of 10 to 14 new residential units per 1000 population through the building
cycle.
It is very important not to unwittingly intervene in the market, by messing around with
land supply, unnecessarily imposing costs and disrupting this natural process – because
this tends to cause wilder new residential production swings and within a reasonable
time, degrades the performance and culture of the construction sector. In other words, it
simply makes housing construction unnecessarily more expensive over time.
Using the measure of “residential units per 1000 population” will be foreign to many of
those reading this submission. It is in very common usage within Western Europe and
provides an excellent measure of the intensity of residential construction between urban
markets and across borders. Another common Western European measure is the number
of existing residential units per 1000 population.
The above estimates of residential unit production levels should only be considered
“indicative” at this stage – as this particular issue needs to be researched further. In
estimating it – we focus on three key components, being (a) the replacement of the
existing housing stock (b) estimated new household formations and (c) that people per
household is slowly declining each year.
The replacement factor can vary, depending on the volume of existing housing stock and
the estimated life of it. With our type of construction in New Zealand and Australia, we
work on housing having on average a life of 100 years. We have approximately 1.47
million houses in New Zealand – and the natural process of replacement has been
retarded for decades, due to inflated land prices. . We know too, that New Zealand’s
population is currently growing by approximately 50,000 a year, with around 11,000 net
new migrants and a natural increase in the population base (births over deaths) of
approximately 39,000. Allowing for the constant trend of diminishing household sizes
and one additional house for 2.5 people (to allow for diminishing numbers of people per
household), this suggests that around 20,000 additional residential units should be built
annually for the increased population, with a further 14,700 replacement units of the
existing stock (a rather high estimate due to replacement having been retarded) – bringing
the total to an estimated 34,700 new residential units being required annually.
There has been very little discussion of the issue of “obsolescence”. This is in fact very
important. There are three types – physical, functional and style obsolescence. As we
become increasingly more affluent (and yes – more demanding), this process will likely
speed up. We know that new housing sizes in “normal” (i.e. affordable) markets is
increasing by approximately 1% a year. So it is important that any new housing stock we
put in place has the capacity to be adapted and extended in time, to cope with future
needs. So there must be adequate land around it – to assist in stalling its functional and
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style obsolescence. These two most often “kick in” well prior to physical obsolescence
taking place. Much of the stand alone New Zealand State Housing built from the late
1930’s on by the first Labour Government, is an excellent example of this sustainable
approach to development. The Labour leaders of the time - being Prime Minister Michael
Joseph Savage, Bob Semple and John A Lee, had no intention of inflicting the inflexible
(largely incapable of being adapted to meet future needs), dense style British housing on
New Zealanders.
The reality is that we have been “spluttering along” under building for years – and now
require significant “catch up”, to bring the average age of our housing stock up to
reasonable levels. One only has to observe the good quality of our cars (where supply is
not constrained) parked outside what is too often, obsolete housing (where supply is
constrained) – housing stock that should have been bulldozed years ago.
You will recall that I mentioned earlier “build rates per 1000 population” – a measure in
common usage in Europe. With New Zealand population of 4,177,000 and an estimated
average annual building requirement as outlined above of 34,700 – this suggests a build
rate of 8.31 per 1000 population. At a build rate of 9 / 1000, the annual new build would
be 37,593 new units. A build rate of 7 / 1000 population indicates 29,235 new units
annually. The “swing built rate” should probably be around 8 through the building cycle
– for an urban market growing around 1% population annually.
But as the graph from Infometrics below suggests, we are badly undershooting these
figures –
It is also worth noting from the above graph, that New Zealanders are in no hurry to
move in to dense apartment living, even as local government has done all it can to inflate
the prices of land and detached housing prices, to force people in to this type of
accommodation. As the saying goes – preference always trumps policy.
But to return to the “build rates per 1000 population” issue - my initial estimates are that
we have been under building by approximately 10,000 residential units for many years
now (Australia is currently under building by approximately 40 – 50,000 units per year).
We need to get our “annual build rate per 1000 population” up around the 9 / 1000
population mark and maintain it at this level for many years to come. There is after all, a
large backload of obsolete housing stock to replace as mentioned earlier.
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Ireland (population 4,239,000) - with a population slightly larger than our own, has been
ramping up its housing construction for years and put in place 96,000 units last year. This
massive ramp up in housing production was caused by the unresponsive planning system
of that country (surprisingly mirroring the British system), persistently lagging in
releasing sufficient land as the economy expanded rapidly. This triggered property
inflation and an unnecessary speculative frenzy, which is now only beginning to subside,
as the market is beginning to realize, that these “scarcities” are fading.
The Irish build rate during 2006 was 23 residential units per 1000 population. Spain, with
a population of slightly in excess of 40 million and in a catch up phase as well, put in
place around 800,000 residential units last year – a build rate per 1000 population of near
20.
There are three state / national markets I like to compare. I refer to them as “the good, the
bad and the ugly” - Texas, California and the United Kingdom. Let’s see how land supply
strangulation suppresses housing construction –
The Good The Bad The Ugly
TEXAS CALIFORNIA U.K
Population (mil) 23.5 36.5 60.8
Pop growth 06 1.8 0.9 0.3
NAHB
Residential Units
Consented (‘000) 216 150 195
Annual Build Rate
Per 1000 pop 9.19 4.11 3.21
The “annual build rates per thousand population” measure illustrates the severity of the
problems in California and the United Kingdom. Texas with the smallest population by
far, put in place more than each of the other two markets. If, with our population base of
4,177,000, we were currently building at the California rate, we would be putting in place
17,167 residential units annually – and at the British build rate 13,408 (about half New
Zealand’s current annual build rate of 26,000). With respect to New Zealand - barely
replacement levels in the case of California and below replacement levels at the British
rate.
Rather interestingly too – Texas actually put in place more “dense housing” (referred to
as “five plus units”) than the much larger California during 2006. Around 2,200 higher
density developments for both States with 42,000 units in California and 48,000 units in
Texas, according to the National Association of Home Builders . The reality of course, is
that lower land prices stimulate more development and greater volumes of all forms of
development. As the old development saying goes “If you get the land wrong –
everything else is wrong”.
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My view is that the British political culture will not likely have the capacity to deal with
the problem (I hope I’m wrong on this score) – and it wont be too long before we see the
“Great British Migration” get underway. As the Irish and the Spanish housing markets
become increasingly affordable (due to the high build rates) and encourage inwards
migration to keep employment levels high within their construction sectors, these
countries and others throughout Europe and elsewhere, will be in a strong position to
capitalize on the self inflicted British system – grossly undersupplying and inflating its
housing market.
Because our urban markets within New Zealand and Australia are severely distorted and
inflated due to artificial land scarcity, we have not had normal building cycles for some
years now. Strangled markets inflate, then pause, then inflate again. Our new residential
market is largely driven off the back of the artificially inflated equity of existing home
owners (something our Reserve Bank is attempting to control by persistently lifting the
OCR – currently 8% – but cannot influence significantly), providing a platform for
excessive leveraged household debt (now overall around 160% of household incomes).
Household debt levels ranged between 50 and 60% during the 1970’s. So most of the new
residential building is for existing home owners, as those without property and on lower
incomes, have effectively been priced out of the new and existing housing market.
HOUSING CONSTRUCTION COSTS IN AFFORDABLE MARKETS.
Our initial research within the affordable North American markets is that standard type
new starter housing with land on the fringe, is being put in place at around $700 per
square metre building area (house and land package) and the section / lot component of it
is in the order of $100 to $150 per square metres building area – suggesting the building
component is in the order of $550 to $600 per square metre. So, if a new starter home is
150 square metres it would cost $US105, 000 – a 200 square metre starter home $US140,
000. For what we would consider a new house and land package “executive home” the
cost would be in the order of $US1, 000 per square metre.
This is why we must focus our attention on the affordable urban markets of North
America. On a square metre basis, they are simply the best performers around the world.
A good example of this is Colonnade Homes based in Dallas Fort Worth, Texas, which I
understand is the 45th largest residential production home builder in Texas. The website is
excellent, with plans and outline specifications (referred to as Special Features) provided,
One can meander through the huge numbers of production house builders within this
State via the Texas Home Builders Network website , to gain a better perspective of
pricing and quality for new housing. The Houston Chronicle Homefront page is an
excellent resource to get a sense of the pricing levels for new and existing stock across
this particular urban market, as is the Houston Association of Realtors website . Check
out other States as well. The reason I suggest the Texas websites, is because of their very
high standard and the excellent information provided.
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The Americans talk in terms of what housing should cost on a per square foot basis. You
will note in reading the Houston Chronicle feature above, that the average rate per square
foot for housing in Houston has “climbed” to $US73.05 per square foot or $US786.31 per
square metre (one square metre equal 10.764 square feet). The “map” of Houston within
the Resource Section is excellent – as it provides housing per square foot price guides for
the different areas of the Houston region. That means that Houstonians – instead of
playing the “property inflation game to poverty” – actually have the income left over, to
live decently.
There is of course an urgent need for comprehensive research on what new starter
housing should cost on our urban fringes. My initial thoughts are that it should mirror the
above figures in New Zealand dollars and with respect to Australia, in Australian dollars
too. The major reason for this is that American wages are higher than Australian ones –
which in turn are higher than New Zealand wages. Our prices could be slightly higher –
but not by much.
In other words – we should over a reasonable time, start seeing new starter homes (house
and land packages) of 150 square metres through to 200 square metres, being put in place
around our urban fringes at $700 per square metre or $105,000 to $140,000 (in 2007
dollars) Currently – we are not even getting the sections / lots in for that! To re establish
this level of affordability would take many years - and the process of enhancing
productivity performance within our residential production building sector can only
start – if we get on now and deal with the artificial land scarcity problem.
To assist in this regard, a number of us within New Zealand, Australia and the United
States intend within the next few months, to embark on a detailed Study of new fringe
housing costs for Dallas Fort Worth, Sydney and Auckland.
RESTORING HOUSING AFFORDABILITY
Within the 2007 Demographia International Housing Affordability Survey (Page 23), we
set out seven key areas that should be focused on in restoring housing affordability,
within urban markets that are currently experiencing housing stress. They are as follows –
• The need to set housing affordability targets.
• Liberalizing land use processes.
• Minimizing peripheral land price distortions.
• Equitable infrastructure financing.
• Economic impact analysis.
• Professional education.
• Research.
Because the survey covers six countries, the suggestions made are of necessity broad.
With this submission, I will expand on these suggestions where required, as they relate to
New Zealand.
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It is my view that the process of restoring housing affordability should properly be a
local community responsibility. Central (or State) Governments role should be to put in
place the necessary guidelines and provide the support – with social and economic
measures via the Local Government Act – and environmental measures via the
(environmental effects based) Resource Management Act. Housing Affordability
Targets based on the Median Multiple (and other supplementary measures) need to
be put in place, so that local authorities create the environment so that housing
affordability can be restored to three times annual gross household incomes on a
reasonable phased basis over a period of ten years.
There needs to be mechanisms put in place to assist local authorities that fail to meet
these phased targets – to the extent - some may need to have their regulatory powers
taken from them and replaced by an outside agency for a time, until the phased targets are
“back on track”.
Regional and local government must know clearly, that this is a serious issue and that
they owe it to their communities, to work collaboratively with central government in
addressing this issue.
THE NEED TO SET HOUSING AFFORDABILITY TARGETS.
Put rather bluntly, we are simply talking “hot air” with respect to this issue, if we do not
have robust, clearly understood and workable measures and indicators in place, to assess
housing performance and stress within local authority areas and individual urban markets.
One of the major reasons for getting the Demographia Surveys underway was to start in
to the process of putting in place sound and responsible measures. We must not forget
that the reason why this housing affordability problem “got out of hand”, was because
much of the information was of such poor quality – to the extent - “inflation” has been
sold to the public as “growth”.
A good place to start in the development of workable measures and indicators, is the
World Bank and United Nations guidelines referred to earlier and as referenced within
the 2007 Demographia Survey.
As I see it, the Median Multiple should be seen as the Key Indicator, with other social
and economic Supplementary Indicators underpinning it. It is important too – that they
are as simple as possible, so that they are readily understood. After all – this is not a
complex issue (although some would like to make it so – due to either a lack of
understanding or their own self interest – too often both). In researching these issues
globally, I have found the British “gifted” at making the simple – complex - and this I
would suggest, is a major reason why progress on this issue is slow in that country.
In Australia to date - there has been reluctance (particularly by the private sector) in
getting Median Multiple Surveys underway of local authority areas at State level and
instead there have been instances of convoluted and meaningless Indicators being
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generated, in a vain endeavour to mask the problem. These people need to realize that the
days of “masking” are over.
Also in common usage in Australia is the “years of land supply” measure, which is
unhelpful and misleading, as it deliberately avoids dealing with the artificial raw land
price inflation caused by unresponsive zoning. Better to deal head on with these fringe
zone price differences as outlined further on within this submission. We sometimes rib
the Australians in pointing out the “years of supply” method is the Rolls Royce approach.
Plenty of Rolls Royce’s available – but no Ford’s or Holden’s!
I would suggest that the following Indicators should be considered –
(a) Key Indicator – Median Multiple Survey of all Local Authorities and larger urban
markets on an annual basis. The first survey needs to illustrate the trends in Median
Multiples over the past 25 years or so, within each of the surveyed markets.
(b) Supplementary Indicators – Urban Markets -
(i) Urban Markets – Peripheral Land Price Difference Ratio – between the “true
rural” and the “raw urban” (prior to subdivision works commencing). The reason why the
term “true rural” is used is to avoid the current artificial pricing of fringe land not yet
zoned for urban use. In setting the appropriate ratios, further research work would be
required of the affordable North American markets, to ascertain what a realistic ratio
should be. In other words, how much more has to be paid (above rural use) to “trigger” a
sale of farmland for urban subdivision. To keep these ratios to a minimum,
“leapfrogging” must be allowed. My initial thoughts are that to “trigger” sales in an open
and flexible (allowing “leapfrogging”) market, no more than an additional 20% should be
paid. Therefore this would be stated as 1.0 : 1.2 True Rural / Raw Urban – or whatever
realistic ratio is put in place following further research. The current “artificial scarcity
values” are the key issue to be dealt with of course. These must be constantly reviewed.
Better still – treat the fringe rural land as “open zone” and zone it at the time of
development, as is the case with most of the affordable North American urban markets.
(ii) Housing Stock Quantity per 1000 population. As indicated earlier, this measure is
used extensively in Western Europe and is helpful in assessing whether an individual
market is under or over built. It would appear on this measure that we are “under built” in
comparison to Western Europe and Ireland, for example. Again further research is
required on this issue.
(iii) Annual Build Rate per 1000 Population for local authority areas and larger urban
markets – current – and trends over the past 20 years or so. This would assist in gauging
how suppressed (or otherwise) construction is currently and has been historically, within
local authority areas.
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(iv) Floor Space per Person. This would be a very useful measure in assessing the
extent of overcrowding within individual markets. It also provides a “rough guide” on the
age of the housing stock, as new stock is generally increasing in size by about 1%
annually.
(v) Average Age of Housing Stock with Decadal Age Band Graph. This would assist
in gauging the quality of the existing stock and in assessing how much of it is due for
replacement, both now and in the future.
(vi) Residential Vacancy Rates. Somewhat surprisingly, it appears to me that there are
no regular surveys undertaken on this issue of the New Zealand urban markets. Again,
this information is important in assessing the intensity of demand and if there is sufficient
supply to subdue rental inflation. Rental vacancies should not fall below 5% of the stock,
as this tends to stimulate excessive rental inflation.
There is always the temptation to “create” countless numbers of measures, but my
strong view is that it is best to stick with a small number of readily understood ones.
After all -the only reason for the measures, is to provide a foundation to allow us to get
on the path to generate more affordable (which will in turn will mean better quality)
housing over time.. You will note for example, that I have not mentioned build costs
ratios or measures as part of the small number of measures set out above, The reason for
this is that as land supply opens up, the residential construction industry will become
more efficient (simply due to competitive pressures) and in any event, the changes in the
Median Multiple and Peripheral Land Price Differences will, with the other measures, tell
us as much as we need to know.
LIBERRALIZING LAND USE PROCESSES.
The key issue here, is that Local Authorities must get the message “loud and clear” that it
is not in the wider public interest, to artificially inflate land prices and degrade the
existing residential stock and residential construction performance. Artificially inflating
land prices simply does not have any benefits in social, environmental and economic
terms. There is no reputable research from anywhere around the world supporting forced
urban consolidation.
Further to this – housing in environmental terms is a very clean use in comparison with
most farming and horticultural uses. There is no need whatsoever for housing
development consenting processes to be time consuming and unnecessarily costly.
MINIMIZING PERIPHERAL LAND PRICE DIFFERENCES.
The recently released CHRANZ Report Housing Supply in the Auckland Region sets out
suggested steps requiring consideration with respect to releasing land and other matters,
in an endeavour to ease the housing pressures within that region. No doubt CHRANZ and
the report authors will be able to advise the Committee of the response to date from the
relevant authorities.
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Indirectly, I have heard from a good number of sources within the Auckland region, that
the relevant authorities are not even willing to consider the report. If this is in fact the
case, the Committee needs to discuss this issue further with the people involved and
explore ways to best deal with unacceptable “communication failures” of this nature.
I share the view of the CHRANZ Report that steps must be taken as quickly as possible
to open up land supply. How it is done (as explained earlier) should properly be the
responsibility of each local authority (with the support of central government), as it works
in consultation with its community, in achieving phased Housing Affordability Targets.
The residential construction industry will need the foundation of much lower section / lot
prices as quickly as possible around the urban fringes, to lift building volumes up to a
normal range and improve construction performance and cost, so that within ten years, its
performance is in line with affordable markets elsewhere. This process needs time.
EQUITABLE INFRASTRUCTURE FINANCING.
It is indeed interesting how local authorities that engage in the practice of artificially
strangling land supply and deliberately reducing the numbers of fringe subdivisions
substantially, seem to experience the greatest difficulty providing infrastructure (yes – I
am being funny!). Logically – with less new subdivision, it should be easier for them to
cope, but in fact the reverse appears to be the case. Yet within the affordable markets of
North America, infrastructure is rarely an issue - and if it is – in relative terms a minor
one. A good number of these affordable North American markets are coping with annual
population increases of 2% and above.
The reality is that land supply strangulation is an indication that there are serious
performance weaknesses with the governments (whether local, state, central) involved.
There is a strong relationship between the intensity of land supply strangulation and the
quantum of the “new house purchaser infrastructure charges” – often misleadingly
referred to by local government as “developer charges”. As the “property manufacturers”
or intermediaries, the developers and builders simply pass these costs on (with profit
margins of course) to the new house buyer. They have no other option.
It is more efficient and equitable for those who actually own the infrastructure, to be
responsible for the appropriate financing of it. The new house owners do not of course
own this infrastructure.
Appropriately – most of the new infrastructure should be debt financed on a reducing
basis by the infrastructure provider over its life span. As the infrastructure ages, it will
likely require greater maintenance and the debt financing structures should take account
of this. Large corporate infrastructure providers (whether public or private) should also
have the capacity to finance the infrastructure on significantly more attractive terms and
at lower interest rates, than new home owners.
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New home owners are often “stretched” financing and debt financing and it is simply
unnecessary, inequitable and inefficient to force them to additionally finance assets
owned by large corporate (whether public or private) infrastructure providers. It is often
in the interests of home owners to pay back their mortgages as soon as they can (say
within 15 to 30 years), so that they are in the strongest position possible to meet future
requirements, such as their children’s education and their own retirement needs. It is
simply not appropriate to “tangle up” the longer term infrastructure debt financing, with
the considerably shorter term new home debt financing.
What also needs to be explored is what is known as "Municipal Utility Districts" or
MUD’s sometimes employed in parts of the United States, such as in Florida, Georgia
and Texas (and no doubt others), where a subdivider “packages up” negotiated
components of infrastructure and community facilities within a subdivision, arranges the
debt financing of them and transfers it - as a package - to the Local Authority.
ECONOMIC IMPACT ANALYSIS.
Refer 2007 Demographia Survey “Restoring Housing Affordability” Section, Page 23.
PROFESSIONAL EDUCATION.
The New Zealand Planning profession has very similar problems to those being
experienced by Australian Planners as outlined within the 2004 Planning Institute of
Australia’s National Inquiry Into Planning Education and Employment. Low morale, high
attrition rates and staff having to work within “toxic environments” were just a number of
the problems identified within this rather candid report. Regrettably, there does not
appear to have been any significant consultation with the property industry.
The situation was summed up by one senior planner (Page 29).
“There were other comments made that not only pointed to more complex legislation
being the problem, but over-regulation by planners themselves, with one senior planner
saying:
“My experience suggests a nasty ‘destructive spiral’ caused by new planning schemes
being made unnecessarily complex, containing too much padding and basically over-
regulating development unnecessarily. This over-regulation then captures a much wider
range of applicants in the net, requiring the highest level of public consultation and
development assessment. This in turn increases workloads on DA teams and planning
committees, creates demand for much more red tape and paper work, increases costs for
everyone and leads to delays. All of this then upsets applicants, who then take out their
frustration on Council staff, elected representatives and Council Mayors. (It) leads to
complaints to Planning Ministers and so on, goes the spiral.”
The Lincoln University (Canterbury NZ), Environmental Management Group, which is
responsible for the training of people embarking on a career within the regulatory
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divisions of local authorities (and allied career streams), outlines its role on its website .
Part of it states –
“Throughout the world people continue to be faced with serious and changing
environmental problems. These problems present great challenges to care for the
environment and natural resources.
The use of natural resources to serve both short term and long term needs in urban and
rural communities raises complex issues such as environmental and cultural integrity,
community security, efficiency and equity, sustainability and conflicts of values and
ethics in general. It also raises important issues, regarding the oingoing impacts of
colonisation on Maori and indigenous communities worldwide and their desires to
manage and use their resources, according to their own cultural and political
frameworks. The significance of these concerns is increasingly recognised at national
and international levels. Furthermore, it is now recognised that such issues can seldom
be resolved by a single agency or discipline.”
And further…….
“The Environmental Management Group provides professional education and the
development of research skills at a postgraduate level for positions of responsibility in
areas of environmental management, environmental policy, resource studies and
transport studies. New Zealand Planning Institute accreditation has been granted to
some of the degree programmes associated with these areas.”
My view is that this is where the problems start. Bear in mind that youngsters of 17 or 18
years of age, just out of secondary school, with mostly no life experience are launched in
to this rather high octane philosophical and “scatter gun approach” environment. I would
much prefer it, if there was more focus, so that with a mix of theory and solid practical
experience, they are taught to administer the enabling Resource Management Act 1991
(note the obsolete and repealed Town & Country Planning Act is still incorporated within
the curricula) and allied legislation to “add value” in environmental, social and economic
terms, to the communities they are paid to serve.
If they have an interest in saving the planet, whales, snails, butterflies and all that sort of
stuff, I would much prefer they did this outside work hours, in their own time. The young
- with high hormone levels - must never be denied the opportunity to firstly take
articulate positions that irritate the preceding generation and develop convictions for
things they wish to believe in. Often - its these same people who contribute significantly
in future years, as the hormone levels come back to reasonably manageable levels and
they develop – through experience (the best teacher) – better judgement.
I do not profess to have a sufficient knowledge of education – as my formal education
finished in the fifth form (School Certificate), with a short stint at Lincoln University for
a Wool - classing Certificate – which required a good liver rather than a good brain.
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The economics and the property valuation professions will also need to play their part
too. A significant reason why this housing affordability crisis developed in the first place
was because the business sector failed to adequately articulate the consequences of
property inflation - sometimes simply for what was wrongly and naively seen as reasons
of self interest – to the extent many persisted in referring to “inflation” as “growth”.
This came about partly because the planners (quite often deliberately) failed to involve
these other disciplines within the urban policy making process (I have never been asked
in to the Christchurch City Council for example. No wonder I’m so shy!). Economics
only corroded planners’ visions! But the “visioning” (dreaming) days are over.
Both these professions will need to quickly develop a sound understanding of “micro”
urban economics, based on the United Nations, World Bank and Demographia measures,
so that they are in a position to better assist those involved in regulating our land markets.
RESEARCH
Within “The need for Housing Affordability Targets” section above, suggested measures
are provided as tools to assist in getting the process of restoring housing affordability
underway. There is a need for these measures to be employed in researching the
performance of all local authority areas and significant urban markets, as soon as
possible.
As indicated earlier, this issue is not about “theory”. And it is not “complex”.
It is very important too for us to learn about urban markets that have managed to maintain
internationally acceptable levels of affordability – to see what we can adopt or adapt to
suit our conditions in this part of the world.
ENDS
Words – 12,739 approximately.
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“RESTORING HOUSING AFFORDABILITY”– DEMOGRAPHIA – HUGH PAVLETICH – JUNE 2007